Taylor's Law Shows Fed "Seven Beats Slow" in Cutting Rates

Institutional analysis, the classic "Taylor's Law" model shows that the current Federal Reserve benchmark interest rate is about 1.7 percentage points higher than the reasonable level, which is equivalent to seven 25 basis points of interest rate cuts. Previously released July non-farm payrolls data show that the unemployment rate rose to 4.3%. The latest inflation data showed the Fed's favoured gauge, the so-called core PCE price index, which excludes food and energy items, rose 2.6% year-on-year in June. Fed officials assume a "neutral real rate" of 0.8 per cent and a long-term unemployment rate of 4.2 per cent. Combining these factors, the model calculates an interest rate level of 3.65 per cent, while the current effective federal funds rate is about 5.3 per cent.